Saturday 29 November 2008
Keeping the Nation Poor
As we digest the implications of China’s 4 trillion yuan (HK$4.55 trillion) stimulus plan, it is intriguing to ponder why Beijing chooses infrastructure, buildings and big projects every time growth needs a boost. Should, or can, China achieve long-term growth only by adding physical structures? If and when the time comes to change course, will the existing political-economic institutions accommodate such a transformation?
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Keeping the Nation Poor
Zhiwu Chen
29 November 2008
As we digest the implications of China’s 4 trillion yuan (HK$4.55 trillion) stimulus plan, it is intriguing to ponder why Beijing chooses infrastructure, buildings and big projects every time growth needs a boost. Should, or can, China achieve long-term growth only by adding physical structures? If and when the time comes to change course, will the existing political-economic institutions accommodate such a transformation?
During a recent trip to Brazil, my taxi driver complained about Sao Paulo’s bumpy roads. I responded: “I thought the high oil and iron ore prices had made Brazil boom ... Why hasn’t Brazil spent more on its infrastructure?” He replied: “The Brazilian economy has been doing well. But, whenever the government has extra money, President ‘Lula’ [da Silva] likes to give tax rebates and subsidies to people, instead of using it on the roads. Why?”
“Brazil is a democracy,” I said. “Imagine you were Lula and had US$18 billion at your disposal. Would you spend it on highways, or give each Brazilian US$100?”
“Yes, give it to the people, just to win more votes.”
In China, winning more votes is not part of the equation, and returning money to the people is never the choice. The government doesn’t just spend it, but seems to always favour tangible things.
This partly explains not only why democracies such as India and Brazil lag behind China in infrastructure, but also why China is focusing its new stimulus package on transport systems. In a non-democracy, officials are held accountable to their superiors, not voters. And for one’s superiors, tangible projects are the easiest to recognise. Indeed, while China’s new stimulus plan overwhelmingly emphasises infrastructure, it gives short shrift to social programmes such as health care and education, even though they can reduce household saving pressure and increase private consumption.
This type of spending structure is nothing new to China. Last year, expenditure on health care, social security and unemployment welfare programmes totalled about 15 per cent of the fiscal budget and 2.4 per cent of gross domestic product (far below the typical percentage in both developed and developing nations).
Due to the lack of public oversight on government budgeting, China’s political system is especially biased to favour big, physical projects, and, through taxation and state ownership, the government maintains almost full control over much national income and wealth, maximising the impact of this bias.
Taxation power is hardly checked by the National People’s Congress or the media. As a result, from 1995 to 2007, inflation-adjusted government fiscal revenue increased 5.7 times. In contrast, over the same period, the cumulative increase was 1.6 times for urban residents’ per capita disposable income and 1.2 times for rural peasants’ per capita income. So, China’s “socialism with Chinese characteristics” is an economy where an increasing share of national income goes to the state.
Despite privatisation, there are roughly 119,000 state-owned enterprises today, with a book value of about US$4 trillion. State-owned land is valued at more than US$7 trillion. Combined, these state-owned assets total almost three-quarters of China’s national productive wealth.
With the state owning so much, most of the gains in asset values over the past 30 years have gone into the government’s coffers. For most citizens, wages are the only source of income. But wages - and domestic consumption - have grown at a far slower pace than GDP.
Transforming China from an export-driven economy to one that relies on domestic consumption requires two fundamental reforms. First, ownership rights to the remaining state assets should be distributed equally to China’s 1.3 billion citizens. This can be done by putting these assets into national wealth funds and distributing the funds’ shares to citizens at no cost.
Second, the state budgeting process must be opened up through public hearings in the national legislature and public participation via the media. This will shift spending towards programmes related to people’s needs.
Without such reforms, or returning fiscal surpluses to families through tax cuts and rebates, government investment-based stimulus efforts can provide, at best, a short-term economic boost.
For 30 years, concentrating resources in the government’s hands through state ownership and taxes has served China well. Today, China has decent infrastructure, impressive buildings and an excessive industrial base. Missing is sufficient private consumption to power endogenous growth. China must boost its people’s sense of financial security and affect a rise in private income in line with GDP growth. Building a nation demands more than steel and concrete.
Zhiwu Chen is professor of finance at the Yale School of Management. Copyright: Project Syndicate
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